Chapter 1

Taking the Nickel Tour

IN THIS CHAPTER

Deciding whether you really want to invest in cannabis

Investing in businesses that touch the plant or those that don't

Scoping out different ways to invest in cannabis

Digging up leads on potential investments and researching them

Creating and executing your investment strategy

Whenever you're getting started on a new topic or trying to develop a new skill, you can benefit from having a general understanding of what's involved. It's sort of like reading the plot or synopsis of a movie or book before starting to watch or read it . or seeing the finished product before you start following the instructions to assemble it. You get the gist of what you're about to encounter, which serves as both a framework on which you can hang the details, and the context for more quickly and easily understanding those details.

The purpose of this chapter is to bring you quickly up to speed on the topic of investing in cannabis and to provide the framework and context for understanding topics covered in subsequent chapters.

This book is structured in a way that facilitates skipping around, so feel free to skip this primer if you think you don't need it or if you're looking for more detailed information and guidance about a specific aspect of investing in cannabis. On the other hand, if you're a quick learner with an intuitive mind, you might read this primer and start investing right away based solely on the general directions it presents (not recommended, but it's certainly an option).

Weighing the Pros and Cons of Investing in Cannabis

I don't try to sell anyone on the idea of investing in cannabis, except, of course, prospective investors with lots of cash who want to invest in the cannabis company I run. Even then, I want them to invest with eyes wide open, knowing the potential for both profit and loss. In fact, I actually spend more time discouraging people from investing in cannabis, because I can usually tell quickly from talking with someone who's eager to invest in this industry whether they're too eager and ill-informed or simply won't perform the due diligence necessary to invest wisely.

I don't know you, so I'm not going to try to encourage or discourage you from investing in cannabis businesses. Instead, I present some of the most important pros and cons you should consider and leave the decision up to you.

Pros

The biggest motive people have for investing their money in any venture is profit. Chances are good that you, too, are curious about investing in cannabis because you want to profit from it. The industry is growing in leaps and bounds, and you want in on the action. Nothing wrong with that, but consider other benefits. Here's a complete list (or as complete as I can think of at the moment):

• Profit (which I already mentioned) is the biggie.
• Getting in at or near the bottom of a new and exciting industry is always a thrill. By investing in cannabis, you become a participant, not merely an observer, in the green rush.
• Being able to tell people you know that your investment portfolio or retirement account includes cannabis stock. This may sound silly, but being invested in cannabis says something about who you are and may help you engage in conversations you would otherwise be excluded from.
• If you consume marijuana, you get to invest in a product you enjoy and help to make it more available to others.
• If you invest in medical marijuana, you're investing in medical research and helping to bring those new medicines to market, potentially alleviating some of the world's physical and perhaps even mental suffering.

Life offers us few choices to invest in a new industry in its infancy. I like to think of investing in cannabis as what it would have been like to invest in alcohol three to five years before prohibition was repealed. How often do you get to participate in an industry at the dawn of legalization? Investing in cannabis also reminds me what investing in the dot-com era was like. I got into the technology boom shortly after graduating college and learned a great deal about new industries. Cannabis is a new industry. It presents an opportunity for an investor to be a pioneer.

Cons

As you may have guessed from my reluctance to encourage people to invest in cannabis, I can come up with more reasons not to invest in cannabis than to invest in it. Here's a list of reasons not to invest in cannabis that you should seriously consider before investing in this industry (see Chapter 4 for more details):

• Cannabis attracts money, and money attracts thieves. In addition, many novices eager to invest in cannabis are easy marks because they're eager, naïve, and have money - just the combination of traits a con artist is looking for.

  Many of the successful entrepreneurs in cannabis got their start in the black market, which attracts a very particular personality type. Leopards don't change their spots. Some savvy former black marketers have simply chosen a different crime - instead of dealing in illegal marijuana, they're now on the prowl for unsuspecting investors they can fleece. And they're not the only thieves that pose a threat to cannabis investors, as illustrated in the sidebar, "Crooks in law enforcement."

• With lots of money flowing into the industry from eager investors, even legitimate cannabis stocks are overvalued. The more overvalued a stock is, the further the potential fall. Short sellers often target overvalued stocks just for this reason; then, when the stock price drops, they cash in and everyone else loses. (See Chapter 12 for more about short selling.)
• Cannabis businesses struggle to be profitable due to numerous factors, including the high costs of complying with federal, state, and local marijuana laws; increased security costs; increased bank fees; and the cost of specialized software.
• Cannabis stocks have an increased susceptibility to dilution because cannabis companies have a tougher time getting bank loans in the U.S. (due to federal laws that discourage banks from doing business with cannabis companies). Companies issue and sell more shares to raise money, but that dilutes the value of existing shares.
• Companies that grow cannabis are at risk of cannabis becoming a commodity, and if (when) that happens, prices and profits drop.
• Laws, and enforcement of those laws, are susceptible to change, and if they change in a direction that hurts cannabis businesses, their investors suffer as well.
• Supply-and-demand imbalances are common in the cannabis industry. These imbalances not only disrupt the supply chain but also negatively impact profits by creating market gluts (which drive down prices) or shortages (which increase costs and reduce demand); either way, profits suffer.
• Cannabis still has a healthy black market, even in states where it's legal, and black-market growers and dealers don't pay taxes, so they can afford to sell their product for less. If state and local authorities don't crack down on illegal production and sales, legal businesses have a tough time competing.

Don't rule out investing in cannabis just because of this long list of potential drawbacks. You can considerably reduce your exposure to risk by doing your homework and investing in well-run companies. See Part 2 for guidance on how to properly research businesses and their management teams, and keep up on what's happening in the industry.

CROOKS IN LAW ENFORCEMENT

Corrupt law enforcement officers pose a threat to both legitimate cannabis operations and their investors. These bad cops have been known to raid lawfully operating cannabis operations and take cash and product. Operators have little recourse. What are they going to do, call the cops? Likewise, operators get little sympathy and support at the judicial level.

An unjustified raid can be fatal to a business. I was a partner in a dispensary in Los Angeles that was raided by the police. They took cash and damaged the on-site cultivation facility, causing hundreds of thousands of dollars in losses, not to mention the loss of revenue that occurred as a result of the closure of the business. It took months to recover from the raid, and the city eventually dropped the charges.

Incidents like that still happen and likely will until federal prohibition of marijuana is repealed.

Deciding Whether to Invest in Businesses That Touch the Plant or Those That Don't

One of the first decisions to make before investing in cannabis is whether to invest in businesses that have contact with the plant or those that don't (often referred to as ancillary companies):

• Plant-touching: These businesses come into contact with the plant at some point during the growth, manufacturing, distribution, or sale. They include grow operations, manufacturers of infused products (MIPs), shipping firms, dispensaries, and licensed delivery services. Plant-touching businesses stand to profit most from cannabis, and they're also at the greatest risk of suffering losses when the industry takes a hit.

  If you decide to invest in a plant-touching business,...